Anxiety and uncertainty to remain following the Brexit decision
Currencies Direct June 27th 2016 - 2 minute read
With a European Union (EU) referendum result that revealed that the UK will likely be leaving the EU, sterling fell to a 31-year low, its biggest decline in history. The world’s financial markets were shocked by the result, which immediately saw a massive wave of uncertainty for investors across the globe.
Final results from the referendum show a nation divided with a close 52 to 48 split in favour of a Brexit, causing British banks to take a hit of £97 million.
This week, it is likely that much anxiety and uncertainty will remain throughout the markets, with some experts predicting a post-Brexit recession. Market focus will remain on negotiations, news and other announcements surrounding the Brexit vote.
With a weakened GBPUSD pair, sharp reversals are expected
Following Friday’s result which saw the pair weaken significantly, the GBP/USD exchange rate declined further, lowering to 1.3497 from Friday’s rate of 1.3679. With investors relatively confident in the likelihood of a ‘Remain’ vote victory, particularly sharp reversals are expected within the market at the start of the week.
Today the pair also saw a fresh wave of global risk-aversion after a gloomy outlook for British government debt moving from “stable” to “negative”. Elsewhere the USD/CAD exchange rate rose for the second week in a row, gaining points.
A relatively muted fall in the euro despite the Brexit situation
The fall in the euro was relatively muted, which could point to the EUR remaining strong despite the Brexit situation. A risk of a sudden decline in inflation expectations are expected to push yields up in support of the euro.
The commercial buying needs from the European Monetary Union’s (EMU) current account surplus should outweigh long-term capital outflows, as domestic EMU banks reduce the long-term foreign asset purchases to consolidate their balance sheets, which should in theory, prevent the EUR from weakening.
The Japanese Yen reacted positively to the EU Referendum result
The Japanese yen reacted well to the EU referendum result, with the JPY/USD breaking below 100. However, Japan currently sits on the US Treasury’s list of potential currency manipulators, making it unlikely to intervene with the market significantly, unless it gets approval from the G7.
Junichi Ishikawa, forex analyst at IG Securities in Tokyo, commented: "The focus now falls on Europe, where Brexit could cause a domino effect of states wanting to leave the union. “While this has already been talked about, the main concern for the currency market is European political uncertainty leading to monetary and fiscal policy paralysis.”